The prevalence of corporatism

Jon Chait's regulatory-capture denialism

JONATHAN CHAIT of the New Republictakes issue with some of the lessons I drew earlier this week in my post about Peter Orszag's trip through the Washington-Wall Street revolving door:

I don't think private capture of public functions represent a major, recurring problem with liberal governance. Does the minimum wage result in regulatory capture? Does Social Security? The Earned Income Tax Credit? Moreover, when such capture does occur, liberals can un-capture it, something that happened with student loans, Medicare Advantage, and so on. Libertarians are very interested in the phenomenon of regulations being turned into weapons of business power, but this phenomenon seems like the exception rather than the rule.

First, I should clarify that I did not mean to be pointing out a huge hole in the logic of liberal redistribution. Rather, I was pointing out a problem for the classical progressive idea of the regulatory state as a check on concentrated economic power. In any case, I must say I'm dazzled by the audacity of Mr Chait's claim that the "private capture of public functions" is rare. My reading of the economic and political history of the United States is that regulation is very, very, very often turned into (or originally fashioned) as a weapon of business power. Indeed, as Douglass North, the dean of the historically-grounded "new institutional" school of political economy, has put it:

Institutions are not necessarily or even usually created to be socially efficient; rather they, or at least the formal rules, are created to serve the interests of those with the bargaining power to create new rules.

Given the historical record, Mr North's principle would seem to be a necessary component of any theory of political economy sufficiently reality-oriented to be useful. I'd ask Mr Chait to consider that one may accept that regulation is not necessarily, or even usually, in the public interest while rejecting the absurd claim that no regulation, or no welfare program, is in the public interest. Our agreement that the EITC has not been turned against its intended beneficiaries has no logical bearing on the argument about the prevalence of corporate control of regulatory power.

Mr Chait's regulatory-capture denialism is especially notable when the matter at hand is the Washington-Wall Street nexus, as the case for a significant degree of coprorate control over financial regulation is extremely compelling. Indeed, that this revolving door is so well-trafficked constitutes perhaps the most impressive piece of evidence that financial regulators are too bound up socially, professionally, and ideologically with their regulatees to offer impartial oversight in the public interest. While I don't agree with all the details of, say, Simon Johnson's account of Wall Street's capture of Washington, much of it is quite convincing. For example:

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup's executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson's predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street's worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Of course, financial markets are not the only ones largely regulated in the interests of dominant firms. Tim Wu's recent book, "The Master Switch", relates the sordid history of anti-competitive regulation in communications and media:

The federal government's role in radio and television from the 1920s through the 1960s, for instance, was nothing short of a disgrace. In the service of chain broadcasting, it wrecked a vibrant, decentralizes AM marketplace. At the behest of the ascendant radio industry, it blocked the arrival and prospetcs of FM, and then it put the brakes on television, reserving it for the NBC-CBS duopoly. Finally, from the 1950s through the 1960s, it did everything in its power to prevent cable television from challenging the primacy of the networks.

... Time and again [the government] has stood beside concentrated power against the underdog at the expense of economic dynamism. Governments' tendency to protect large market players amounts to an illegitimate complicity, whether by reason of the firm's involvement in important government concerns..., or a general sense of obligation to protect big industries irrespective of their having become uncompetitive.

Examples could be mutiplied ad nauseam. I should mention that neither Mr Johnson nor Mr Wu is remotely libertarian. Regulatory capture is far from an exclusively libertarian preoccupation. If one wishes to keep abreast of the latest national news in regulatory capture and other devices of American corporatism, one can do no better than the the work of the Washington Examiner's Timothy Carney, who does have some libertarian leanings. However, whatever one's ideological predilections, perusing Mr Carney's archives ought to be more than enough to disabuse anyone of the belief that "regulations being turned into weapons of business power" is not a "major, reccuring problem".

"Do YOU want to put yourself, or your loved ones, at the TOTAL mercy of government bureaucrats with respect to health care? That is what single-payer does."

Err, not necessarily.

For instance, a single-payer system that was dedicated to basic care would allow people to buy supplementary health insurance on the private market. Or allow you to go to the doctor of your choice and pay cash.

There are many types of health care and health insurance systems. Dozens of them pay far less than the US "system" (actually, not one pays more) while covering every single citizen and achieving superior public health results.

Ritchie, there are numerous examples of single-payer providing the same basic level of care as the US for a fraction of the cost, both to the government and overall.

While markets are great with competitively-oriented feedback loops for many (most) products, health care simply isn't one of them. Most people don't know much about health care, its quality or its pricing (that's why we consult doctors), and so can't effectively judge value in order to respond to it. Further, since most of us really want to be alive and healthy, the system has near unlimited demand, despite rising prices - as long as people can be convinced that a procedure or product is saving our life or our health, people will buy it, even if its benefit is minimal or its cost is huge (example: full body MRIs). The result from this and other breakdowns of the typical market structure is that competition in the health care market is typically oriented to increasing market share by expanding the number and cost of services, regardless of the overall cost-benefit of those services.

Besides, market-based systems have inefficiencies themselves. Administrative costs are higher in market-based systems where multiple actors must communicate, often with their own preferences, than in single-payer systems where providers only need communicate with the government in an established, predictable way. Marketing and advertising, unnecessary in government-run systems, add to the cost in market-based ones.

In the end, results speak for themselves. The US, a market-based health care system, costs far more (2-2.5 times as much) than government-owned systems like that of the UK or single-payer social insurance systems like that of Canada, while delivering roughly equivalent end-results in terms of mortality and quality of life.

So when you exclaim that the liberal suggestions for health care "DO NOT WORK", I say that if that's the case, based on real-world track records, conservative suggestions for health care, to put it elegantly, REALLY DO NOT WORK.

This is all beside the point, of course - as you've said, "private sector insurance would cease to exist" under single-payer plans, which is exactly what I was stating; it's centrist or conservative policies, such as Obamacare (and the nearly-identical Mitt Romney Massachusetts plan) that produce regulatory capture, not liberal policies.

It has certainly been a problem in finance, and it was easy. Economic theory that supported political ideology that masked raw interest all combined together to make an industry effort at regulatory capture superflous. Wall Street was the Abbey of Theleme, the only rule "Faictz ce que vouldras," and so they did - all the way down, dragging the rest of us with them.

As I've written before, prudential regulation ought to be in the hands of a financial historian. He will be much less gullible and far less subject to capture than a banker or an economist.

I fear that our blogger and Bamp miss an important feature of regulatory capture here.

Businesses want to be regulated. The big tobacco companies wanted the special taxes and regulations of the “settlement” 15 years ago and arranged it so that they had a monopoly on cigarette production for a quarter of a century. The AMA, ABA, etc. need licensing to control competition. The trucking and airline industries were deregulated 30 years ago, and have since had to become efficient, and distressed.

The economic forces that makes industries and even individuals seek governmental protection from the market place also appeals to those in government who gain secure jobs and improve their clout when regulations are broadened. And so bamp’s neutral financial historian will soon become a financial historian because he can find easy work in regulating, and hopes that he will soon find himself very profitably in the cycle described by our blogger.

Capitalism forces entities to become efficient, enforces morality and cures greed. The fact that we have regulations only reflects the entrepreneurs’ unbridled avarice and complicit governments more than anxious to accommodate those with wealth gained from monopolistic practices granted by their own largess.

The libertarian solution is the only one that I can imagine. Maybe others see it differently.

I have to agree with WW about the prevalence of regulatory capture, particularly in the United States, but the reasons behind that prevalence are more complex than simply a flaw in traditional liberalism.

Take the health care debate. In the end, insurance companies came out pretty well, with constraints on how they deliver care and provide insurance, but really none on the pricing of it, all while guaranteeing them customers under the law. The most liberal proposal would have been single-payer, which would have decimated those insurance companies, was not even on the table, deemed to be too socialist to ever pass. The next most liberal proposal was the public option, taken off the table very quickly at the behest of conservative Democrats, and to entice the odd centrist Republican. This would have provided competition to private insurance companies, reducing their market share and profitability. Attempts to allow Medicare to competitively negotiate prices, or to reduce payouts, were blocked by largely the same group - Republicans and the right wing of the Democratic party.

Financial reform hit much the same snag - government-expanding liberal ideas that did not sell out Washington to Wall Street (bank tax, for example) were killed not by the left of Congress, but by the center-right.

It just repeats. Any plan not to sell Washington out is shouted down by Republicans for being either detrimental to the economy by hurting businesses or for being socialist in some way. Don't get me wrong, the core of the Democratic party, and Obama in particular, share much of this blame through collusion or complacency, but it's not classic progressivism that's the driving force here.

"As regulation is also very, very, very often turned into a weapon of organized labor."

When I was reading the article I was thinking about how an increasingly powerful government stifles competition and efficiencies in many industries - just one example is the tremendous political power of the public sector unions who exercise their political influence to obtain favorable treatment.

colm5, statistics on mortality and quality of life are little comfort to the INDIVIDUAL who finds himself denied treatment in a single-payer system ... and has no recourse to get that treatment without leaving the country, as many have done to come here and get what their single-payer systems would not ... or would not in reasonable time ... provide.

In fact, the case could be made that, by providing that alternative and the incentives for innovation, our market-based system is subsidizing those single-payer systems you tout.

It is a question of liberty, at least as much as cost ... the liberty to find and/or provide alternatives when what you have fails you.

Do YOU want to put yourself, or your loved ones, at the TOTAL mercy of government bureaucrats with respect to health care? That is what single-payer does. You cite the economic costs, while broad-brushing the costs to specific individuals with respect to both quality of life, and liberty itself.

The irony here is that the only way corporations can attain the oppressive power so often attributed to them by the political Left, is through the very collusion with government described here ...

... and that the political Left, by their advocacy of a greater and greater role for government to play in economic decision making, is increasing the opportunities for corporations to gain such oppressive power.

Those who decry corporate "dominance" are creating their own monster and don't even know it ... or know it and think their allies in government can restrain the monster; you have to wonder if the terms "obese probability" have any relevance to the cognitive processes of such as these.

Without this collusion, corporate power is VERY limited ... were it not so, Sears, Penney's, Macy's et. al would have never let Sam Walton get past Wal-Mart #2 and steal so much business from them, to cite just one example.

And I would expand upon what jaylat stated ... that the level of altruism that drives the entire world of "non-profit" pursuits (academia/science/social activism/environmental activism/government) is way overstated.

When a scientist shades his findings to curry favor from those offering the next grant ... is that not greed?

When an educator toes the Party Line of his institution in order to attain tenure ... is that not greed?

When an activist selectively sensationalizes a perceived crisis, so that it doesn't go to waste with respect to fundraising ... is that not greed?

When a government bureaucrat hides behind "rules" in order to minimize their workload at the expense of citizen service ... and/or when they engage in empire-building ... is that not greed?

And yet the "non-profit" community is held up as so much more noble than those who differ from them, only in the public declaration of their intent to make a profit ... another manifestation of the conventional wisdom of the last century that needs to be debunked and disposed of.

erwinhaas is right--businesses that are big enough to capture the regulatory process, acting alone or collectively, want government regulation that they can then control, to freeze out new competitors and esatblish monopoly or oligopoly rents. This is seen at all levels of government.

Chait is in a dream world if he thinks most insurance regulators aren't limited by what the regulated insurers want, or utility regulators, or regulated professions, a host of others.

None of which has anything to do with Social Security, tho to think that Medicare isn't strongly influenced by doctors, hospitals and pharmaceutical companies is just naive beyond words.

A certain amount of regulation is often necessary, but one should not be under the illusion that the regulated are impotent to influence and in some cases substantially control it.

... This week Representative Spencer T. Bachus of Alabama, the incoming chairman of the Financial Services Committee, announced that Mr. Paul would have the job.

Mr. Bachus has endorsed Fed audits that go beyond the limited review called for by the Dodd-Frank Act, but he is anything but hostile to banks. He told The Birmingham News last week that “my view is that Washington and the regulators are there to serve the banks.”

It has ever been thus. The idea that governments can be run by altruistic bureaucrats devoid of personal interests is silly. Please show me one such person.

I think things should flip the other way - reward government functionaries for doing a good job. Instead of graft call it a bonus, or an equity kicker. At least you'd attract a better quality of bureaucrat, and it likely wouldn't cost any more.

MartyJ wrote: "erwinhaas is right--businesses that are big enough to capture the regulatory process, acting alone or collectively, want government regulation that they can then control, to freeze out new competitors and esatblish monopoly or oligopoly rents. This is seen at all levels of government."

Change one word of that sentence, from 'business' to 'teachers union' - and you find yourself with the only government sanctioned monopoly in the U.S.

While I agree that regulatory capture is a problem, there is another side to the 'revolving door' story. A government which doesn't have enough people experienced in business or finance is likely to pass stupid and counterproductive laws simply by failing to realize how much harm they are doing. So it's desirable to have some businesspeople in government (and yes, bankers count as businesspeople). That's why Obama has had so much flak for failing to appoint one to his senior team. I suspect there is some optimum level where you have enough executive types to catch stupid policies and not so many that they take over the entire system. WW, perhaps your next article could look at how we go from here towards the optimum level?

colm5, the problem with the Progressive policies you advocate is that they severely degrade, if not totally destroy, the feedback loops between decision and consequence that curb the excesses of human nature and steer us all into sustainable civil interaction.

The realization of the various options in health care you describe would inevitably lead ... as politicians continued to expand the public system and impose greater regulations and mandates upon the private-sector insurers in the name of better serving their constituents ... to a single-payer, institutionalized system where those who run it have no sustainable incentive (beyond the glacial/unpredictable political process) to maintain, much less improve, the effectiveness and timeliness of serving their clients (one of the forms of greed I described earlier).

The incentives to make things better, including the incentive to innovate and develop new treatments/drugs/devices/methods for health care, would be severely degraded.

And, since we have a government that (rightly) demands equal protection under the law, such a health care system would lack the flexibility to meet the individual needs of EACH and EVERY of our 300 million citizens ... yet those citizens would have NO effective recourse or work-around (because ultimately, private-sector insurance would cease to exist, cash payment would be prohibited in the name of "fairness" as they tried to do with Hillarycare in the 1990's, and charitable care would be subject to the same government gatekeepers as everyone else) when the bureaucrats get it wrong.

Health care is not "a" problem ... it is 300 MILLION PROBLEMS that require the attention of 300 million individuals who are closest to the problem ... for it is simply beyond the capability of a few Best and Brightest in DC to understand the problemS sufficiently well to solve this problem FOR each and every citizen.

We conservatives shout down the efforts you advocate ... not because we are greedy, cold SOB's ... but because they DO NOT WORK. All you do is simply facilitate the greed of another group, but eliminate the citizen's ability to walk away from the greedy and find more equitable alternatives.

And BTW, you don't have true competition when one provider has the force of law behind them ... whether that be by the soft, cuddly fascism of collusion, or by government "competition" via a public option.